Category: Blog post

One of the challenges in getting to grips with the public finances is that government accounting can be just a little bit weird.  Without the strictures of double entry bookkeeping and balance sheets that (well) balance, it can often appear mysterious.

For example, take the Curious Incident of the Surplus in the Night-Time (or 2019/20 to be more specific).

A £10 billion surplus, according to the official forecasts published published just three weeks ago. If achieved, the Chancellor will have met his objective of balancing income with expenditure for the first time in decades. We will finally be in a position to start paying down some of the national debt, instead of just ‘inflating it away’ as a proportion of GDP.

But, hang on a second. Curiously, the Treasury is actually forecasting in the Budget that we will be £10 billion worse off in 2019/20, not £10 billion better off, with the national debt expected to increase from £1,715 billion to £1,725 billion over the year to 31 March 2020.

Even stranger, there is a forecast for £9 billion in asset sales, the proceeds of which we are told are used to pay off debt. So, a £10 billion increase in public sector net debt instead of the £19 billion reduction in debt that we might expect to see instead.

The Curious Incident of a Surplus in 2019/20.  One that doesn’t result in a positive improvement in the Government’s financial position.

A mystery indeed.

 

One of the challenges about trying to predict what will happen in the Budget is that the Chancellor has so many different levers that he can pull.  George Osborne could increase taxes or he could cut them.  He could increase spending or reduce it.  He could borrow more or he could reduce debt.

What makes predicting the Budget so difficult is that the Chancellor can and will do all of the above at the same time.

His existing plans to balance cash inflows with outflows requires tax revenues in 2019/20 to be £73 billion higher than this financial year, with £51 billion coming from economic growth and £22 billion from higher taxes.  With economic growth now expected to be lower he needs to find substantial sums to meet his revenue targets without damaging the economy in the process. This is why radical ideas like abolishing tax relief on pensions have been floated, as they are a way of raising substantial sums now, without (it is hoped) doing too much immediate damage to the economy.

With removing income tax relief on pensions rejected, he will be looking for a different route to raise the money he needs.  One possibility might be charging national insurance on employer contributions into private sector pension funds, while another might be to start cutting away at some of VAT anomalies, such as the lack of VAT on books and newspapers.  Together with rumoured increases in fuel and alcohol duties these measures could help him to meet his revenue target, even assuming phasing in over a number of years.

Of course, no Budget is possible without some form of tax cut or incentive to encourage good behaviour. Even as George takes pounds away with one hand, he will want to give back a few pennies with the other. Of course, this includes continuing the policy of raising personal tax allowances, but I would be surprised if there weren’t some other forms of tax giveaway in the offing. For small businesses, there might be some relief from increases in business rates.

He may need to increase the level of spending cuts he has to deliver, but that is more of an issue for 2018/19 and 2019/20 than it is for the new financial year. Yes, revenues will be lower, but low inflation and the extended period of low interest rates are likely to reduce some of the pressure on costs in the coming year.

If he does have any room to manoeuvre, the smart money is on George trying to increase investment infrastructure. With private infrastructure investment going into reverse following the ending of renewable energy incentives, the Chancellor may decide now is the time to increase the level of direct public investment. Boosting the economy with extra investment now may be the best way to ensure that the Government meets its revenue targets in four years time.

Headlines are likely to focus on whether the Government will achieve its objective of reducing debt as a proportion of GDP in 2015/16. This is dependent on the combination of inflation and economic growth increasing GDP and some £23 billion in asset sales to bring the ratio down. With both inflation and economic growth looking to be lower than expected, and with some of the planned asset sales deferred to the new financial year, this objective may not be met.

Perhaps more interesting will be the position going forward, especially in the three years between now and the 2019/20 financial year that George is committed to going into surplus. With lower deficits in the intervening years, he will have some flexibility in those years to borrow extra to fund investment or, if he chooses, to accept a slightly slower path in cost reductions just as he already has had to do with benefits in the form of tax credits.

So I am looking forward to the Budget on Wednesday. Surprises are guaranteed.

Simply UK: A Summary Guide to UK Government Finances 2015/16 is being launched tonight at the Institute of Chartered Accountants in England & Wales in the City of London.

How much is the Government going to spend this year? How does that compare with the amount raised in tax? What is austerity and how is the deficit being reduced? How much is the national debt and what is happening to it? What is the size of the economy anyway?

Transparency in public finances has frequently meant the provision of ever increasing amounts of financial information, without a focus on the need to make that information understandable. As a consequence, most of us know little about our government and how it is financed.

Simply UK aims to remedy that situation by providing a clear and concise summary of the UK Government’s financial position, using vivid and colourful charts to clearly explain how the national debt has grown by £1 trillion over the last decade and how economic growth, tax increases and austerity spending reductions are contributing to the Government’s objective of eliminating the deficit. It explains where the money comes from and where it goes. It also provides information about the EU Budget for 2015, the overall UK economy, and how the tax and welfare systems work.

Simply UK will be available for sale on Amazon from Monday 28 September 2015.  Click here to order your copy.